What Is Power of Attorney (POA) in a Demat Account? 

To make your investments and trade in the stock market you require a Demat account. This account acts like a digital locker for your shares. While setting this account up you must have heard about the POA full form which stands for Power of Attorney. 

Most of the new investors are curious about what is POA and why POA is needed. It is a type of a document that allows the broker the right to move shares out of your account when you sell your shares.

When an investor signs this document they get a unique record on your account. The POA number depicts the specific code which tracks this legal agreement between the investor and the broker. Using a POA in share market trades makes life much easier for you as an investor. 

What Is Power of Attorney (POA) in a Demat Account?

POA acts as a permission slip where it gives the right to the broker that they can take shares from your account only when you decide to sell them. Here you are still the owner of your shares. The broker is just the person who helps move them from your locker to the buyer.

Let us understand this with an example, let’s say that being the owner of the car you have put your car in a safe locked space. And if you are looking to sell your car you must have to go to that space, take out your car and drive it to deliver it to the buyer. But this will take a lot of time and effort.

But what if you have given a “Specific Power of Attorney” to the owner of the garage and you have given them a spare key, but they can only use it if you send them a message saying, “I have sold the car, please deliver it to the buyer.” The manager cannot use your car for personal trips or sell it to anyone else without your order. In the stock market, your broker is the garage manager and the POA is that spare key.

The role of a POA is to handle the “debit” or the outgoing side of your trades. When you buy shares, you don’t need a POA because the shares are coming into your account automatically. This is only required when you sell, transfer or pledge your securities. The main task that it looks for is moving up shares to the stock exchange or use them as a guarantee to get extra money for trading.

How Does POA Work in a Demat Account?

The process begins when the investor signs the POA form when you open your account. Your broker then records this permission in their system. This is how you get connected with your digital signature to the actual share holdings.

Wherever you open the app and want to sell your shares you just click on the “sell” button and the broker acts on your behalf. Here the broker looks at the sell order and as per rights given under POA the broker asks the depository (like NSDL or CDSL) to move the shares from sellers account to the buyers account. The depository checks if the POA is valid and then transfers the shares to the exchange so the buyer can get them.

The broker or Depository Participant (DP) behaves like a helping hand. Their job is to follow your orders as it is. They are guided by strict rules from SEBI. The POA is only triggered when you take an action, like selling a stock or pledging shares to get more trading margin. Without your sell order, the broker cannot move anything.

Types of Power of Attorney in Demat Accounts

There are mainly two types of POA that every investor should know about. One is very common, and the other is something you should usually avoid for basic investing.

1. Specific (Limited) POA

This is the standard version used by almost everyone. It gives the broker permission to do only 4 or 5 specific things. These include selling your shares, pledging them for margin, or helping with mutual fund transfers. It is valid as long as your account is open, it is a safe option as there are limitations on what the broker can act upon. 

2. General POA

A General POA is very broad in nature as it gives the person holding it the power to do almost anything on your behalf. They could open new accounts or move your money around. This is rarely used in the stock market unless you are using a high-end service where a professional manages everything for you. For a normal investor, this is not recommended.

Read Also: What is Demat Debit and Pledge Instruction (DDPI)?

Why Do Brokers Ask for POA?

Brokers ask for a POA to make sure your trades don’t get stuck by some minor mistake. In the Indian market, everything moves very fast. When you sell a share today, it must reach the exchange very quickly.

• Quick and Easy Settlement: The POA allows the broker to send your shares to the buyer immediately, which helps in avoiding penalties for the late delivery.

• Ease of Trading: Without a POA, you would have to give a physical or digital slip for every single sale. If you trade ten times a day, doing this manually would be very annoying and could lead to some mistake.

• Margin Trading: If you want to trade with more money than you have in cash, you can “pledge” your shares as a guarantee. The POA makes this process instant and hassle free.

• No Repeated Approvals: It is a one time procedure where once you sign it, you don’t have to worry about the paperwork every time you book a profit.

Is POA Mandatory for a Demat Account?

Many people think they must sign a POA to open an account, but that is not true. According to SEBI guidelines, a POA is completely optional and investors can open a Demat account and start investing even without it.

If you choose not to give a POA, you can still sell your shares. However, you will have to use a system called “e-DIS.” In this system whenever you would like to sell your share you have to manually enter a 6 digit TPIN and for final verification an OTP will be shared to your registered mobile number.

Recently we have seen that brokers have opted for a new safe option known as DDPI (Demat Debit and Pledge Instruction) which works like the limited POA (limitations on broker) but this option has tighter restrictions and is more secure for the investors. You can either opt for POA, DDPI or can sell the shares manually using the TPIN method. 

Benefits of Giving POA

Here are multiple perks if you give a POA to a trusted broker like Pocketful.

• Fast Execution: The shares that you have sold reach the buyers account within time and you avoid the short delivery fines (if not shared within time). 

• Zero Paperwork: No physical slips or couriers are required to be shared with your broker, just sign the POA one time and you can stay care free. 

• Better Opportunities: As there is a rapid fluctuation in the market by giving a POA you can sell your shares instantly the moment you get the right price. 

• Simple Pledging: The extra shares in your demat account can give you extra limits for intraday or F&O trading. 

Risks and Concerns of POA

Trust Factor: Here the biggest concern is that you are giving powers directly to your broker to move your shares on your behalf but if the broker is not honest at any moment then there is a risk of misuse.

• Old Formats: Earlier POA forms had a broad spectrum to cover but modern versions like DDPI are much more reliable and safe for the investors. 
• Monitoring: One shall always check their account statement and SMS alerts to monitor if the movements are correctly done or not. As here you would have to give a penalty if something goes wrong. 

Read Also: FIFO in Demat: Meaning, Rules & Tax Impact

How to Give (Execute) POA for a Demat Account

To activate POA for your trading account you would need to follow the given steps:

• Registration Form: The first step is to download the POA or DDPI form, from the broker’s website. 

• Fill the Details: Here you need to put your name and provide your 16-digit Demat account number.  

• Check the Limits: One should always cross check that you are only giving rights for tasks like “settlement” and “pledging”. 

• Sign Online or Offline: You can opt if you want to e-sign via mobile number (aadhar linked) or go for the offline method.

• Get Confirmation: You will receive an email of confirmation as soon as the depository registers your POA.

Safety Tips Before Granting POA

Before you sign any document, keep these tips in mind to stay safe:

• Reputation Matters: One should only rely on brokers that are registered with SEBI and also have a decent track record. 

• Read the Clauses: Always cross check before signing the final document and be cautious about any clause that states or gives the broker the power to handle your bank account or give total control over the account. 

• Track Alerts: Always pay attention to the SMS and emails you get from NSDL or CDSL.

• Nominee is a Must: Nominee is a must add for your account as this keeps your family protected. 

Read Also: What is a Basic Service Demat Account?

How to Revoke or Modify POA

You have the power to cancel your POA at any time you feel so. It does not bind you for a fixed period of time.

• How to Revoke: A formal written request needs to be shared with your broker for revoking the signed document although some brokers even let you do this process online by e-signing the revocation letter/form.
• How to Modify: If any changes required the old POA needs to be cancelled and a fresh POA needs to be signed as per the new conditions. 
• Processing Time: The revocation request can be usually processed within 3 to 5 working days, once done you have to only use your TPIN and OTP for selling your shares. 

Conclusion

Power Of Attorney is a tool that is designed to help the investor to ease down their trading faster and easier. It acts as a helping assistant for moving your sold shares to the buyers account, so that investors like you can focus on planning your next move rather than focusing on the timely movements of shares. Although this is optional, most of the traders prefer this as it relieves the investors from risk of penalties due to delayed procedure or any technical fault. By staying alert and choosing a transparent platform like Pocketful, you can trade with peace of mind and keep your costs low.

For more market news and insights, download Pocketful – offering users zero brokerage on delivery trades and an easy to use platform designed for both beginners and experienced investors Pocketful.

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